Democracy Is the New Quantitative Easing
Recent elections results in India and subsequent top-performing markets prove that investors shouldn't chase QE.
India is proof that democracy is more powerful than quantitative easing. There has been much written over the excitement of India's election results, with many arguing that a new era is coming in the world's largest democracy. Oddly, talk of India as a "Fragile Five" member has gone quiet, but make no mistake about it: If everyone is talking about a crisis, it either already happened or it never will. The crisis in India never existed, and a massive up-move has seemingly taken everyone by surprise.
Last year, the Federal Reserve's QE program was credited for sending the S&P 500 (INDEXSP:.INX) up 30%. The WisdomTree India Earnings Fund ETF (NYSEARCA:EPI) is up about as much so far in 2014, with no stimulus in place. The narrative that QE is so effective seems to be at odds with the reality of how other countries have behaved. Markets don't move based on money -- they move based on hope. Clearly that hope can be a powerful force in the beginning stages of a sea change on the fiscal side. Sometimes that hope lasts, sometimes not.
In the case of Japan, for example, hope failed to maintain the bull trend. Despite numerous intelligent arguments for why Japan is due for prolonged strength, nearly all of last year's huge move on Abenomics occurred in the first five months of the year. Take a look below at the price ratio of the WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) relative to the S&P 500. As a reminder, a rising price ratio means the numerator/DXJ is outperforming (up more/down less) the denominator/SPY. A falling ratio means underperformance.
Click to enlarge
Japan on a relative basis has been an abysmal performer. Democracy and the return of Abe caused a lot of hope for escape velocity, but markets simply haven't reflected that for nearly a year now, despite continued QE by the Bank of Japan. India may be undergoing a similar situation, although clearly the reflation/debt trap dynamics are very different, as well as the country's growth prospects from a demographic and industrialization standpoint. However, the notion that one should chase QE is simply invalid. India is proof of that, with its markets now being the best-performing on a global front since March 2009.
I'll take the will of the people over the will of the Federal Reserve any day. How about you?
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter